As new technologies and payment innovations advance, the regulatory frameworks that are needed to guarantee their fair and legal operation cannot always adapt quickly enough. This creates new obstacles to financial inclusion. After all, the merchant in a small kiosk who, instead of selling only batteries, cigarettes and phone airtime, is now taking in and handing out money via customers’ mobile phones, has essentially become a bank teller.

While it is one thing to handle simple cash transactions via mobile phone, the question is whether the merchant can use the same system to take deposits and sell insurance – seen as a critical next step in mobile finance – without being regulated as a bank.

In December 2008, Kenyan finance minister John Michuki ordered an audit of Safaricom’s mobile money transfer service M-Pesa, which has attracted more than 6.5 million subscribers since its launch in 2007. The service, which operates primarily to arrange the transfer of money from one mobile phone user to another, had existed outside the regulatory framework. But its popularity, and the perception that it was open to abuse, has drawn the attention of policymakers keen to prevent fraudulent activities such as kidnapping and money laundering, easier to carry out using M-Pesa because of a lack of traceable transaction records.

At the end of the audit in January 2009, Joseph Kinyua, Kenya’s permanent secretary to the Treasury, said that the audit had reassured the Treasury. “I would like to assure Kenyans that this innovative idea of money transfer through the mobile telephones is safe and reliable,” he said, adding that the treasury and central bank would continue to oversee its safety and reliability.

Other non-profit microfinance institutions are likely to attract similar scrutiny, since taking deposits and offering insurance products requires regulatory supervision. As recognition grows that the real power of financial inclusion lies in being able to offer precisely these types of products, many are considering altering their legal status.

Some laws provide for flexibility. Grameen America, for example, has applied for a credit union licence so that it can accept savings and deposits across the US. However, as mobile banking and cashless transactions become ubiquitous, the challenge for regulators is to reshape their legislative regimes in ways that protect account holders but do not hamper the development of innovative ways of delivering banking services.